Tenants and Investors Finding Great Suburban Opportunities

CHICAGO—Leasing activity in Chicago’s suburban region fell for the first time since the fourth quarter of 2017, dropping by more than 20% to 1.1 million square feet, according to a new report on the office sector from Savills Studley. Other statistics also illustrate that overall, the suburban market now struggles after enjoying a very modest recovery from the recession.

Tenants have leased about five million square feet in the four most recent quarters, falling well short of the market’s long-term average, the report says. The overall availability rate jumped by 170 bps to 28.3%, and the class A availability rate rose by 60 bps to 27.4%. And the average overall asking rent dipped by 0.4% to $23.39 while the class A asking rent fell by 0.8% to $26.60.

The story, however, is hardly one of doom and gloom.

“There are pockets with a lot of activity, Oak Brook and O’Hare in particular,” Jon Azulay, corporate managing director at Savills, tells GlobeSt.com. The class A availability rate in O’Hare now stands at 16.1%.

Furthermore, much of the vacancy is attributed to empty corporate campuses, such as McDonald’s, that developers plan to demolish and reconstruct. Tenants, meanwhile, have ramped up their searches for better accommodations, and landlords are obliging with more concessions and upgraded amenities, a combination that helps their properties compete with the lure of downtown.

It also seems notable that suburban Chicago has gotten quite popular with investors, to the point where it beats out the Chicago CBD in sales volume.

“As money moves in from the coasts, these investors have found that Chicago is still an affordable market which generates good returns,” Azulay says. Honolulu-based Shidler Group is about to acquire Triangle Plaza in the O’Hare submarket for approximately $143 million, or about $226 per square foot, a 49% spike from the $96 million that Sam Zell’s firm paid in 2010 for the twin buildings at 8750 and 8770 W. Bryn Mawr Ave. The complex was 95% leased at the end of the quarter.

Office property sales in all of Chicagoland during the last six months (through August 2018) totaled $2.9 billion, a 51% increase compared to the previous six-month total of $1.9 billion, according to Savills Studley. But the suburbs accounted for $1.5 billion of the most recent sales while the CBD witnessed sales of $1.36 billion.

Still, there is no doubt that the migration of suburban tenants into the CBD will continue. Ferrara Candy is currently in talks to move its headquarters from 1 Tower Ln. in Oakbrook Terrace to the newly completed 625 W. Adams St. in Chicago’s West Loop. The candy maker may lease about 60,000 square feet.

“Ferrara is a young company with a lot of young employees,” Azulay says, and in some ways it still competes with Google to recruit talent. In such cases, offices in vibrant neighborhoods like the West Loop, so favored by millennials, are a must. “On the flip side, you have a lot of companies that have decided to keep stay in the suburbs.”

German grocery store chain Aldi, for example, just expanded to 113,000 square feet in Naperville Woods Office Center at 1000-1100 E. Warrenville Rd. This is an administrative office for the chain, and “they’re looking for a different type of talent, so they don’t need to spend two to three times more on their real estate,” Azulay says.

And for companies that do decide to stay or keep most of their employees in the suburbs, this is a time of opportunity. Most of the suburban areas have many options, with at least 35 contiguous blocks of 50,000 square feet or more available in all submarkets except O’Hare, according to the Savills report.

“Landlords recognize there is a flight to quality,” Azulay says, and in class A buildings, it is now almost required that they provide excellent food service, state-of-the-art fitness centers, and advanced conference facilities. “And if you are in O’Hare but not next to the El, you had better provide a shuttle to the train.”

But the suburban market still needs fundamental changes if it is to truly compete with the city. Above all, municipalities need to decide what will happen to the many obsolete corporate campuses that office users no longer want. And some are making progress.

Houston-based Hines plans to buy and demolish the McDonald’s campus in Oak Brook and build a “village center” with a mix of office, residential, retail and hospitality space. Municipal officials are looking over the proposal, and Azulay is optimistic that they will give the necessary approval, partly due to the developer’s reputation.

“Hines is one of the most respected developers in both Chicago and around the country,” he says. “It has a vision for this property, and it has the capital. I would be surprised if Oak Brook did not give it a green light.”